OPEC+ Production Cuts: Impact on the Tanker Market

On Sunday, OPEC+ countries, led by Saudi Arabia, surprised the oil market by agreeing to cut production by 1.6 million barrels per day (b/d) starting in May. While analysts expect actual reductions to be around 1 million b/d, the decision has already had a significant impact on the tanker market.

Analysts suggest that the OPEC+ move could be a symptom of weaker-than-expected physical oil demand or a manipulation tactic to raise prices above sub-$80-per-barrel pricing, with the demand-rebound story still intact.

The tanker market's spot rates for non-eco-design VLCCs on the Middle East Gulf-China route were down to $56,300 per day on Tuesday, a plunge of $17,900 per day or 24% compared to Friday. Tanker stocks also predictably fell on Monday, with Nordic American Tankers, DHT, Frontline, and Teekay Tankers dropping 12%, 11%, 10%, and 9%, respectively. However, these stocks stabilized on Tuesday.

According to shipping analyst Omar Nokta at Jefferies, charterers are not expected to begin booking May cargoes, which are set to be 1 million b/d below April volumes, until mid-April. Thus, the latest weakness in spot rates appears to be driven more by sentiment than the imbalance brought on by the OPEC cuts.

Although the OPEC+ cuts are inherently bearish for fundamentals, it could lead to quicker rebalancing of oil supply and demand and a resumption of OPEC production. Multiple tanker analysts and brokers believe that the effect of the OPEC cuts will be limited, as lost OPEC barrels would be replaced by Atlantic Basin supplies shipped to Asian buyers, increasing ton-mile demand.

Despite the recent plunge in spot rates and tanker stocks, tanker analysts and brokers maintain that the fundamental set-up still points to higher earnings, cash flow, asset values, and dividends. Evercore ISI transportation analyst Jon Chappell believes that barring a true global recession that changes the demand dynamic through 2024, the tanker market's outlook is still positive.

In conclusion, the OPEC+ production cuts have had a significant impact on the tanker market. However, analysts suggest that the effect will be limited, and the tanker market's outlook remains positive, barring any unforeseen circumstances.